CORRESPONDKNCH 


BhI  Wl.hN 


Hon.  EDWARD  M.  GROUT.  Comptroller 


AND 


WHEELER  H.  PECKHAM 


WITH  REFERENCE  TO  THE  PLAN  OF  MR.  STEPHENSON 
FOR  USE  OF  THE  CITY  SINKING  FUND 


lEx  HtbrtB 


SEYMOUR  DURST 


When  you  leave,  please  leave  this  hook 

Because  it  has  been  said 
"Ever  thing  comes  t'  him  who  waits 

87(cept  a  loaned  book." 


Avery  Architectural  and  Fine  Arts  Library 
Gift  of  Seymour  B.  Durst  Old  York  Library 


DEPARTMENT  OF  FINANCE, 


City  of  New  York. 

Edward  M.  Gkout, 

Comptroller. 

October  7,  1902. 

Wheeler  H.  Peckiiam,  Esq., 

President,  City  Club, 
19  West  84tli  Street,  City. 

Bear  Sir  :—l  take  the  liberty  of  inviting  your  at- 
tention to  the  enclosed  proposition  concerning  the  Sink- 
ing Funds  of  the  City,  and  in  behalf  of  the  administra- 
tion of  the  City,  I  would  be  pleased  if  you  would  write 
me  your  views  as  to  the  advisability  of  the  City  adopt- 
ing the  plan  suggested.  We  believe  that  the  plan  is 
free  from  legal  objections,  and  if  adopted,  it  will  relieve 
taxation  eight  and  one-half  millions  next  year,  and  by 
an  increasing  amount  thereafter,  without  impairing,  we 
believe,  the  security  of  the  bondholders. 

Please  regard  this  as  strictly  confidential,  as  it  is  de- 
sirable to  avoid  public  discussion  while  the  plan  is  un 
der  consideration.    If  approved  generally  by  those  to 
whom  it  is  submitted,  it  will  then  be  made  public. 
Very  truly  yours 

(Signed)    Edwaiu)  M  Grol^t, 
Comptroller. 


2 


October  9tii,  1902. 

Edward  M.  Grout,  Esq., 
New  York. 

Dear  Sir  /—Yours  of  the  7tli  instant  received.  You 
say  that  you  '  would  be  pleased  if  (you)  I  should  write 
you  (your)  my  views  as  to  the  advisability  of  the  City 
adopting  the  plan  suggested,'  viz :  the  plan  of  Mr. 
Stephenson  as  to  use  of  the  City  sinking  fund. 

To  my  mind  it  seems  but  another  of  the  numberless 
eiforts  of  mankind  to  make  fiat  money  or  to  avoid  the 
performance  of  contracts  which  owing  to  change  of  cir- 
cumstances have  become  burdensome. 

Let  us  see  what  the  sinking  fund  is.  It  amounts  to  a 
provision  that  to  secure  the  payment  of  its  bonds  a  cer- 
tain sum  shall  be  annually  raised  by  taxation,  and  kept 
and  ultimately  applied  only  to  such  payment. 

In  order  that  such  sum  so  raised  by  taxation  shall 
not  lie  idle,  the  law  permits  it  to  be  invested  in  City 
bonds  which  thereby  are  practically  paid,  although  as 
mere  bookkeeping  they  are  kept  alive  until  the  payment 
of  the  outstanding  bonds  for  whose  benefit  the  sinking 
fund  was  established. 

Now  the  provision  and  object  of  the  sinking  fund 
are  one  of  two  things.  1.  Either  the  raising  by  tax- 
ation of  a  fund  sufficient  and  more  than  sufficient  to 
pay  the  bonds  for  which  it  was  raised,  and  holding  that 
fund  as  security  for  that  purpose  until  the  purpose  has 
been  accomplished,  or 

2nd.  In  allowing  its  investment  in  the  secured  or 
other  City  bonds  to  keep  down  the  indebtedness  of  the 
City  of  New  York  by  raising  by  taxation  a  larger  sum. 
The  value  of  the  bonds  is  thus  increased  because  of  the 
diminished  obligations  of  the  obligor  the  City. 

The  only  other  way  in  which  the  holder  of  a  City 
bond  secured  by  the  sinking  fund  could  possibly  benefit 


3 


is  that  if  he  had  the  right  to  liave  the  bonds  in  the  .sink- 
ing fund  sold  lie  inighi  realize  his  pr(ji)ortion  of  the 
proceeds  and  liold  his  own  honds  for  tlie  l)ahincH  due. 
Wiiether  he  has  such  right  I  have  not  examined  and  do 
not  know.  Phiinly  he  could  only  get  the  face  of  his 
own  bond. 

Tlie  zeal  gist  of  his  security  is  his  right  to  have  the 
stipulated  sum  raised  every  year  by  taxation. 

Now  what  is  the  plan.  First  and  dehnitely  not  to 
raise  by  taxation  the  stipuhited  sum. 

Thar  is  a  breach  of  contract.  Mr.  Stevens  admits  it. 
But  his  plan  is  to  issue  more  or  uem  l)ondsand  have  the 
Sinking  Fund  Commissioners  invest  in  them  and  in  that 
way  to  relieve  the  taxpayers  so  as  not  to  raise  the 
amount  by  taxation. 

Xow  this  interposition  of  tlie  new  bonds  surely  makes 
no  difference. 

The  indebtedness  of  tlin  City  is  not  decreased  thereby 
— on  the  contrary  is  increased  and  the  stipulated  sum  is 
not  raised  by  taxation. 

The  effect  is  precisely  the  same  as  if  without  the  issue 
of  new  bonds  the  raising  of  money  for  the  sinking  fund 
by  taxation  was  omitted. 

The  issue  of  new  bonds  and  putting  them  in  the  sink- 
ing lund  in  no  way  satisfies  the  requirement  of  the  law 
which  rightly  construed  says  that  with  the  money  raised 
by  taxation  jld  outstanding  bonds  may  be  purchased 
and  tlie  indebtedness  of  the  (Jittj  thus  reduced. 

The  above  objections  api)ear  more  or  less  clearly  in 
your  letter  to  the  Mayor  on  ]mges  6  and  7  of  the  i)amph- 
let  you  sent  me. 

On  page  6  you  say  The  net  result  to  the  taxpayer  is 
the  same  as  if  the  whole  fund  were  put  upon  this 
basis,"  /.  e.,  the  basis  of  the  later  sinking  funds  wherein 
only  enough  money  to  pay  the  debt  when  due  was 


4 


raised.  You  add  :  "  The  method  it  is  true  is  circuitous^ 
bat  necessarily  so." 

Now  if  to  do  this  thing  directly  would  be  illegal,  can 
it  be  supposed  that  any  circuity  effecting  the  same  thing 
would  be  legal  ? 

On  page  7  you  say  "  If  a  power  to  issue  bonds  the 
proceeds  of  which  should  go  to  the  General  Fund  for 
the  Reduction  of  Taxation  were  created  broadly  and 
without  limitation,  then  the  plan  would  be  objection- 
able, for  that  would  be  borrowing  to  meet  the  annual 
expenses." 

But  is  not  a  "power  to  issue  bonds  the  proceeds  of 
which  should  go  to  the  General  Fund  for  the  Reduction 
of  Taxation  "  for  the  reduction  of  annual  taxation  for  a 
specific  purpose  provided  for  by  the  law  equally  object- 
ionable as  borrowing  to  meet  annual  expenses?" 

On  the  same  page,  7,  you  say,  "  It  is  thus  not  a  power 
to  borrow  on  bonds  iov  annual  maintenance^ — but  only 
a  power  to  use  annualy  a  certain  excess  in  the  Sinking 
Fund  applying  it  to  its  normal  purpose  and  to  give  to 
the  fund  in  exchange  the  stipulated  security." 

But  you  don't  give  the  stipulated  security.  The 
stipulated  security  involved  the  raising  of  money  hy 
taxation  and  the  purchase  of  existing  bonds  and  the 
diminishing  of  the  indebtedness  of  the  City. 

Your  plan  in  effect  involves  the  raising  of  no  money 
by  taxation,  the  piirc?iase  of  no  bonds,  but  does  involve 
an  increase  of  indebtedness  by  the  issue  of  new  bonds 
and  the  placing  of'  such  7iew  bonds  in  the  sinking  fund. 

I  think  you  will  agree  with  me  that  if  it  had  been 
proposed  to  put  such  a  feature  in  the  original  sinking 
fund  law,  it  would  have  been  laughed  to  scorn  by  every 
man  capable  of  thinking  on  the  subject. 

Is  it  any  less  absurd  now  ? 

This  sinking  fund  law  is  a  contract,  which  all  agree 


must  be  sji(;redJy  complied  with.  Can  tliat  now  be  a 
eompliimce  witli  the  contract,  which  if  it  liad  oi'i^^inally 
been  proposed  as  the  contract  would  have  been  out  of 
hand  rejected  ? 

You  say  (p.  6)  that  holdin<;  a  {h,'btor\s  obligation  as 
collateral  is  an  absurdity. 

It  is  an  absolute  and  i)errect  absurdity  if  such  collat- 
eral obli  fixations  are  new  and  issued  only  for  the  pur- 
pose ;  but  if  such  obligations  are  old  and  are  paid  off  or 
purchased  by  the  debtor  for  a  sinking  fund,  it  is  no  ab- 
surdity. It  reduces  the  indebtedness  of  the  obligor  and 
thereby  increases  the  security  of  the  creditor. 

The  sum  of  the  situation  I  take  to  be  this. 

The  security  of  the  public  creditor  given  by  law  has, 
owing  to  the  jjrosperity  of  tlie  City,  turned  out  to  be 
unnecessarily  good  ;  and  the  question  is,  does  that  fur- 
nish the  City  with  a  legal  ground  for  breaking  its  con- 
tract ? 

It  seems  to  me  that  there  can  be  but  one  answer,  and 
that  that  must  be  the  same  whether  the  method  be 
direct  or  circuitous. 

The  proposed  action  seems  to  me  quite  on  a  i^ar  with 
repudiation,  unless  the  creditor  will  reduce  the  rate  of 
interest  because  the  market  rate  of  interest  has  fallen. 

This  scheme  w^ould  reduce  the  security  because  it  has 
increased  in  value. 

Neither  can  be  done  without  the  consent  of  the 
creditor. 

Suppose  that  we  faced  misfortune  instead  of  pros- 
perity, what  w^ould  be  thought  of  the  demand  of  the 
creditor  for  increased  security,  there  being  no  default 
on  the  part  of  the  City  ? 

In  the  varied  relations  of  mankind  uo  one  is  of  so 
great  importance  as  that  of  contract.  Above  all  things 
the  public  faith  must  remain  untarnished  even  by  the 
smallest  blemish.    In  this  i)articular  case,  I  think  we 


6 


should  rather  rejoice  at  the  good  fortune  which  has 
given  a  surplus  to  this  sinking  fund  than  to  try  by  any 
other  means  than  the  consent  of  the  City's  creditors  to 
diminish  the  excess  of  their  security. 

It  is  fair  to  say  that  I  write  this  letter  without  con- 
sultation with  any  member  of  the  City  Club,  or  indeed 
with  anyone  else. 

Under  the  terms  of  your  letter  I  did  not  feel  free  to 
talk  with  anyone. 

I  imagine,  however,  that  no  one  in  the  City  Club  will 
dissent. 

Yours  truly, 
(Signed;    Wheeler  H.  Peckham. 


DEPARTMENT  OF  FINANCE, 

City  of  New  Yohk. 

Edward  M.  Grout, 

Comptroller, 

October  9,  1902. 

Mr.  Wheeler  H.  Peckham, 

80  Broadway, 
New  York  City. 

Dear  Sir. — I  have  yours  of  the  9th  instant.  I  fear 
that  we  have  not  succeeded,  in  the  pamphlet  sent  you, 
in  making  clear  the  facts  of  the  situation.  You  define 
the  Sinking  Fund  as  "a  provision  that  to  secure  the 
payment  of  the  bonds  a  certain  sum  shall  be  annually 
raised  by  taxation  and  kept  and  ultimately  applied  only 
to  such  a  payment,"  and  it  seems  to  me  that  your  en- 
tire discussion  is  based  upon  this  definition.  It  is  not 
proposed  to  alter  in  any  degree  any  of  the  sinking  funds 


7 


wliich  fall  witliiii  tliis  delinirion,  but  to  leave  tlinn  in- 
tact and  in  every  respect  just  as  you  urge. 

But  if  you  will  re-i-ead  thr  papers  sent  to  you,  you 
will  find  that  there  are  two  Sinkiuii;  Founds  distinctly 
not  within  this  definition  — the  Sinkiuii;  Fund  for  the 
redemption  of  the  City  debt,  known  as  the  Sinking 
Fund  No.  1,  and  the  sinking  fund  for  tlie  payment  of 
interest  on  the  debt.     These  funds  are  not  maintained 
by  an  annual  installment  to  be  raised  by  taxation,  but 
are  maintained  by  the  p)ledge  of  all  the  revenues  of  the 
City  from  water,  docks,  franchises,  &c.,  and  they  now 
yield  an  income  which  this  year  is  eight  and  one-half 
millions  in  excess  of  what  the  annual  installment  to  be 
raised  by  taxation  and  sufTicient  at  tlie  end  to  })ay  off 
the  debt,  would  be.    The  contract  is  that  these  revenues 
shall  go  to  the  Sinking  Fund  and  that  the  assets  of  the 
Sinking  Fund  shall  be  invested  in  the  securities  of  the 
City.     The  proposition  is  to  invest  in  General  Fund 
Bonds  only  so  much  of  the  revenues  of  these  old  Sink- 
ing Funds  as  exceed  what  would  be  the  annual  install- 
ment sufficient  to  pay  off  the  principal.    In  other  words, 
the  proposition  is  to  put  these  Sinking  Funds  on  prac- 
tically the  same  basis  as  the  Sinking  Fund  provided  for 
in  the  Constitution  for  water  bonds,  and  the  sinking 
fund  provided  for  in  the  present  Charter  for  the  debt 
incurred  by  taxation. 

If  I  have  not  made  the  facts  clear  to  you  in  this  letter, 
or  if  they  are  not  clear  upon  re-reading  the  pamphlet,  I 
will  be  very  much  obliged  if  I  could  arrange  to  see  you 
some  time. 

Yours  very  truly, 

(Signed)      Edward  M.  Grout, 

Comptroller. 


8 


October  10,  1902. 

Hon  Edward  M.  Grout, 

Comptroller,  etc., 

Bear  Sir. — I  thank  you  for  yours  of  the  9th  instant 
which  corrects  a  misapprehension  of  mine. 

The  correction,  however,  to  my  mind  only  makes  it 
more  clear  that  the  conclusion  I  reached  was  sound. 

Certain  revenues  are  pledged  to  the  sinking  fund  as  a 
security  for  certain  bonds. 

The  meaning  of  that  is  that  these  revenues  must  be 
collected  kept  and  accumulated  in  the  sinking  fund  at 
least  until  the  amount  so  collected  shall  be  equal  to  the 
amount  principal  and  interest  of  the  outstanding  bonds 
for  which  the  sinking  fund  is  security. 

Now  comes  the  investment  clause.  It  is  provided,  I 
understand,  that  this  fund  so  collected  and  paid  into 
the  sinking  fund  may  be  invested  in  City  bonds. 

Does  that  mean  existing  City  bonds  theretofore  is- 
sued for  a  valuable  consideration  or  new  City  bonds  is- 
sued without  consideration  except  that  collections  in 
the  sinking  fund  are  paid  for  them  (/.  e.  one  City  De- 
partment pays  another  City  Department  one  pocket 
pays  another  pocket  one  hand  pays  the  other)  and  such 
collections  are  then  used  for  general  purposes  and  to 
that  extent  lessen  taxation  ? 

All  the  reasoning  of  my  letter  of  the  9tli  instant  now 
applies. 

The  contract  to  my  mind  can  bear  no  construction 
other  than  that  these  revenues  shall  be  invested  in  ex- 
isting securities,  the  purchase  of  which  shall  have  the 
effect  of  diminishing  existing  indebtedness  and  shall 
not  be  applied  to  general  purposes  to  the  relief  of  taxa- 
tion. 

Your  plan  does  apply  these  pledged  revenues  to 
general  purposes  and  to  the  relief  of  taxation  and  is 


9 


not  made  a  whit  more  valid  by  the  fact  that  it  does  it 
b\'  a  circuitous  method.  new  l)onds  to  he  issued 

do  not  diminish  but  on  the  conlrary  if  ilicy  have  any 
effect  increase  the  in(h'l)t<Mlncss  of  tlie  city. 

They  really  have  no  effect.  Tiiey  do  not  increjise  the 
City  indebtedness  because  wh^Mi  the  outstanding  bonds 
are  paid  the  new  bonds  also  are  paid  ;  but  they  do  not 
decrease  the  indebtedness  as  the  investment  in  or  pur- 
chase of  old  bonds  w^ould  decrease  it. 

You  might  just  as  well  take  this  surplus  direct  from 
the  sinking  fund  and  apply  it  to  any  general  purpose. 
The  use  of  new  bonds  is  mere  form  and  effects  notliiug 
substantial. 

If  my  views,  thus  expressed,  seem  to  you  not  conclu- 
sive, and  you  think  that  any  benefit  can  be  derived 
from  talking  the  matter  over,  I  would  be  very  glad  to 
see  you  either  by  yourself  or  with  others  and  will  be 
happy  to  call  on  you  at  such  time  and  place  as  you  may 
name,  only  premising  that  I  generally  now  leave  the 
City  by  a  4  p.  m.  train. 

Very  truly  yours, 
(Signed)    Wh?:eler  H.  Peckham. 


DEPARTMENT  OF  FINANCE. 

City  of  New  York. 

Edward  M.  Gkout, 

Comptroller. 

October  10,  1902. 

Wheeler  H.  Peckham,  Esq., 

80  Broadway, 
New  York  City. 

Dear  Sir. — I  have  yours  of  the  lOtli  instant,  and  I 
trust  that  the  subject  interests  you  sufficiently  to  ex- 


10 


case  my  pursuing  it  further.    The  provisions  for  the 
investment  of  the  Sinking  Fund  assets  is  found  solely 
in  the  City  Ordinances,  dating  back,  I  think,  to  the 
year  1844.    The  provision  is  that  the  Commissioners 
shall  invest  the  moneys,  or  so  much  as  they  can,  ''in 
the  purchase  of  stocks  created  by  the  corporation  of 
the  City  of  New  York."    Of  course  there  are  no  longer 
any  stocks  in  existence  which  were  issued  prior  to  1844, 
and  I  do  not  think  it  has  ever  been  suggested  that  the 
investment  was  intended  to  be  in  securities  existing  at 
any  particular  time.    It  has  always  been  the  uniform 
practice  of  the  Sinking  Fund  Commissioners  to  invest, 
from  time  to  time,  in  various  securities  freshly  issued 
by  the  Cit3^    I  happen  to  have  signed  to-day  several 
certificates  for  small  issues  of  new  stock  for  various 
purposes,  issued  directly  by  the  City  to  the  Sinking 
Fund  Commissioners,  and  there  has  not  been  a  month 
since  I  have  been  in  office  that  I  have  not  done  the 
same.    In  every  case  tiie  security  is  issued  for  its  par 
value  in  money,  and  that  would  be  the  case  with  the 
General  Fund  bonds  which  are  proposed.    The  only 
difference  involved  in  the  plan  suggested  is  that  a  bond 
shall  be  of  a  new  class  or  kind,  that  is,  Greneral  Fund 
bonds.    In  every  other  respect  they  will  be  exactly  in 
conformit}^  with  what  has  been  the  constant  practice. 

Now  taking  up  the  reasoning  of  your  first  letter, 
which  is  in  effect  that  the  scheme  is  a  breach  of  con- 
tract. May  I  nsk  you  ro  look  at  Chapter  383  of  the 
Laws  of  1878,  in  which  alone  will  be  found  anything  of 
the  nature  of  a  contract  on  this  subject.  That  act  has 
as  its  basis  the  ordinance  of  1844  which  pledged  various 
revenues  to  the  sinking  fund.  The  idea  of  a  scientific 
installment,  whicli,  collected  annually  and  put  on  in- 
terest, would  produce  the  principal,  seems  not  to  have 
been  under  consideration  at  that  time  (1844),  and  the 
Sinking  Fund  was  depended  entirely  upon  the  pledge 


11 


of  certain  iweiiiit's  which  were  then  insii^nilicant  in 
amount  as  c()ini)ar(Ml  with  what  tln'V  ai'»^  to-day.  One 
may  read  within  the  lines  of  this  law  of  1S7S  that  tliese 
revenues  did  not  seem  then  to  he  sullicient  security 
for  the  debt.'  The  purpose  of  the  hiw  was  evidently  to 
make  the  securities  sufficient.  The  Law  ])ledges  to  the 
Sinkim;'  Fund  the  revenues  theretofore^  l)ledged  and  ap- 
X)ropriated,  as  well  as  the  surplus  in  the  sister  fund  — 
the  fund  for  the  payment  of  interest.  At  that  time  there 
was  a  laro^e  number  of  assessment  bonds  outstanding^, 
chargers  upon  the  Sinking  Fund,  which,  it  was  evident, 
would  never  be  met  by  the  assessments  levied  for  them, 
and  the  law  added  to  the  pledge  of  the  revenues  spoken 
of,  the  receipts  which  might  come  from  such  assessments. 
It  then,  in  the  fourth  section,  declared  the  "contrac- 
tual relation  "  between  the  city  and  the  creditors  "un- 
til all  of  such  debt  is  fully  redeemed  and  paid,''  and 
not,  as  you  suggest  in  yonr  second  letter,  until  the 
amount  of  revenues  collected  should  equal  the  principal 
and  interest  of  the  outstanding  bonds.  If  the  provision 
were  as  you  have  suggested,  it  would  be  equitable  and 
the  burden  of  the  Sinking  Fund  would  be  mu(;li  less 
oppressive. 

But  the  purposes  of  the  statute  to  make  a  sufficient  in 
the  place  of  an  insufficient  provision  is  evident  in  the 
seventh  section  of  the  act.  which  provides  for  the  levy 
of  a  tax  whenever  the  revenues  shall  be  insufficient, 
adding  that  the  amount  so  levied  shall  be  not  less  than 
one  million  dollars  in  any  one  year.  Some  years  later 
when  it  was  found  that  the  revenues  were  enough,  and 
more  than  enough,  the  city  was  relieved  from  the  levy 
of  this  one  million  dollars,  and  it  never  has  been  neces- 
sary since  to  make  a  levy  to  supi)lement  the  revenues. 

The  substance  of  it  all  is  that  when  this  contractual 
relation  was  created  by  the  act  of  1S78,  it  was  under- 
stood on  all  sides  that  the  revenues  were  of  <l()iibtful 


12 


sufficiency,  and  that  tlie  purpose  of  the  Legislature  was 
to  insure  them  to  the  Sinking  Fund  and  to  supplement 
them,  but  not  the  i^urpose  to  accumulate  in  the  Sinking 
Fund  five  or  six  times  as  much  as  would  be  required. 
Yet  the  contract  remains,  and  we  do  not  propose,  I 
think,  to  violate  it  in  the  least.  We  mean  that  the 
revenues  should  still  go  into  the  Sinking  Fund  no  mat- 
ter how  great  they  may  be,  and  that  they  shall  still  be 
invested  in  the  stock  of  the  city,  but  the  plan  is  to  issue 
the  General  Fund  bonds  only  for  the  amount  by  which 
the  revenues  exceed  the  requirements  of  the  Sinking 
Fund,  reckoning  them  from  now  on,  as  provided,  as  I 
have  already  stated,  in  the  Constitution,  in  the  new 
Charter,  and  I  may  add,  as  provided  in  Section  8  of  the 
act  of  1878,  and  thus  to  give  present  taxpayers  the 
benefit  of  the  revenues  which  they  are  yearly  creating 
for  the  city  from  markets,  docks,  ferries,  water  system, 
franchises,  and  the  like. 

After  the  Board  of  Estimate  finishes  with  the  Budget 
work,  which  will  be  in  a  week  or  two,  I  would  like  very 
much  to  talk  over  this  matter  with  jou  personally. 
This  plan  has  been  examined  by  a  number  of  lawyers 
and  financiers,  and  yours  is  the  only  adverse  criticism 
which  it  has  met  so  far.  I  feel  thoroughly  convinced 
of  the  soundness  of  the  plan,  yet  I  am  open  to  convic- 
tion upon  the  matter,  and  will^try  to  keep  myself  free 
from  any  pride  of  opinion  on  it. 

Yours  very  truly, 

(Signed^  Edward  M.  Geout, 

Comptroller. 


13 


(Copy.) 

October  13,  1902. 

WnKKLER  H.  Pkcktiam,  Esq.; 
Pres.  City  Club, 

19  West  341  h  Street,  City. 

Dear  Sir.  — 1  have  just  received  the  enclosed  letter 
from  Mr.  Edgar  J.  Levey,  formerly  Deputy  Comi)troller 
and  now  President  and  General  Manager  of  the  Title 
Insui-ance  Company  of  New  York,  whose  thorough 
presentation  of  the  Sinking  Fund  situation  of  the  City 
in  Municipal  Affairs  for  December,  19(K),  will  be  remem- 
bered by  you.  His  approval  of  the  i)hin  suggested  will 
be  of  great  weight  with  the  City  authorities,  and  I 
thouglit  it  might  be  of  interest  to  you  in  your  owu  con- 
sideration of  the  question. 

Yours  very  truly, 

(Signed)        Edward  M.  Grout, 

Comptroller. 


The  Title  Insukance  Company 
OF  New  York. 

No.  149  Broadway,  New  York  City, 

October  11,  1902. 

Hon.  Edward  M.  Grout,  Comptroller,  No.  280  Broad- 
way, New  Y^ork  City  : 

Dear  Sir. — I  acknowledge  receipt  of  your  letter  of 
the  7th  inst.,  enclosing  a  printed  copy  of  correspond- 
ence between  the  Mayor,  Deputy  Comi)tr()ller  Stevenson 
and  yourself  in  regard  to  a  plan  for  relieving  the  tax- 
payers from  the  present  excessive  burden  borne  by 


14 


them  for  the  debt  service  of  the  city  on  account  of  ex- 
isting sinking  fund  provisions.  I  take  pleasure  in  com- 
plying with  your  request  that  I  express  my  opinion 
thereon. 

The  plan  suggested  by  Mr.  Stevenson  and  endorsed 
by  the  Mayor  and  yourself  is  briefly  to  authorize  the 
annual  issue  of  bonds  to  be  known  as  General  Fund 
Bonds,"  to  an  amount  equal  to  the  difference  between 
the  annual  net  revenues  of  the  Sinking  Fund,  known  as 
"Redemption  Fund,  No.  1,"  and  the  amount  which 
would  be  required  by  that  fund  by  scientific  debt 
amortization — such  bonds  to  be  purchased  only  by  the 
Commissioners  of  the  Sinking  Fund,  and  their  proceeds 
to  be  paid  into  the  General  Fund  for  the  Reduction  of 
Taxation.  I  assume,  though  it  is  not  expressly  so 
stated,  that  in  conformity  with  existing  provisions  of 
law,  interest  is  to  be  paid  on  these  bonds  until  their 
maturity  or  earlier  cancellation  ;  but  upon  their  cancel- 
lation, no  payment  of  cash  into  the  Sinking  Fund  is  to 
be  made,  provided  at  that  time  all  the  outstanding 
bonds  which  are  redeemable  from  said  Sinking  Fund 
shall  have  been  paid  or  a  sufficient  amount  reserved  in 
cash  for  their  payment. 

The  practical  effect  of  this  plan,  so  far  as  the  burden 
of  taxation  is  concerned,  is  to  place  the  Redemption 
Fund,  No.  1,  upon  a  scientific  debt-amortizing  basis 
and  when  this  is  accomplished,  the  whole  debt  service 
of  the  city,  with  unimportant  exceptions,  will  be 
similarly  established. 

Under  ordinary  circumstances,  as  Mr.  Stevenson 
frankly  admits,  a  proposition  to  issue  long-term  bonds 
to  provide  for  current  expenses  w^ould  be  indefensible, 
but  in  the  present  instance  the  proposed  "General 
Fund  Bonds"  become  only  nominal  additions  to  the 
funded  debt,  and  the  object  to  be  attained  is  to  free  the 
city  and  the  taxpayers  from  conditions  quite  as  techni- 


15 


cal  and  artificial  as  those  under  whicii  these  l)onds 
would  be  issued.  Tliese  conditions,  moreover,  are  so 
acute,  and  involve  so  <i^reat  a  hardship  ujjon  i  lie  city, 
that  almost  any  device  should  be  welcomed  which  would 
end  them.  In  fact,  if  the  continued  hea[)in<i^  up  of  un- 
necessary Sinking  Fund  accumulations  be  not  soon 
modified  the  city's  financial  system  will  inevitably  be- 
come so  hampered  and  end)arrassed  as  to  affect  seriously 
its  physical  welfare  and  development. 

So  far  as  concerns  the  Iiolders  of  bonds  issued  under 
the  "contractual  pledge"  of  1878,  there  can  arise  no 
cause  of  comi)laint  possessing  the  slightest  substance. 
Tliey  are  absolutely  assured  of  the  ability  of  the  Sink- 
ing Fund  to  redeem  their  bonds  and  no  reasonable  man 
should  require  more.  The  situation  may  be  po[)ularly 
summarized  by  the  following  analoii'y  :  A  merchant, 
Mr.  Smith,  wishing  to  retire,  offers  to  sell  his  business 
—  tluitof  a  large  departuient  store— to  one  of  his  em- 
ployees, Mr.  Jones,  who  possesses  great  ability  but 
small  capital.  For  the  [)urchase  price  he  takes  back  a 
note  payable  in  ten  years'  time,  and  binds  Mr.  Jones  to 
lay  aside  each  year  as  a  sinking  fund  the  gross  receipts 
from  his  hardware  department.  At  the  time  of  the  sale, 
this  hardware  department  is  of  only  minor  importance  ; 
the  laying  aside  of  its  entire  receipts  would  not  crip[)le 
the  conduct  of  the  business,  and  would,  if  continued  on 
the  basis  of  past  sales,  produce  enough  in  ten  years  to 
pay  off  the  debt.  But  soon  after  Mr.  Jones's  purchase 
the  character  of  the  business  changes.  The  hardware 
department  grows  enormously  and  becomes  its  chief 
feature,  so  that  in  four  years  the  accumulated  receipts 
more  than  equal  the  entire  debt.  Mr.  Jones  offers  to 
pay  Mr.  Smith  in  full,  but  the  latter  decdines  because  he 
is  receiving  six  per  cent,  interest  aud  cannot  make  any 
other  investment  which  will  be  as  satisfactory.  Mr. 
Jones  then  says  to  Mr.  Smith  :  *'  If  you  hold  me  to  my 


16 


contract  to  set  aside  beyond  my  reach  and  control  the 
entire  receipts  of  my  hardware  department,  my  business 
will  be  ruined,  and  I  may  even  fail,  because  I  will  not 
have  sufficient  capital  to  carry  it  on."  Mr.  Smith  then 
loolis  upon  the  matter  in  a  different  light.  He  sees  that 
having  too  much  security  may  be  as  bad  as  having  too 
little,  if  it  affects  the  p)Ower  of  his  debtor  to  make 
money  and  remain  solvent  and  successful.  He  there- 
fore says  to  Mr.  Jones  :  "If  you  will  set  aside  and  de- 
posit in  a  trust  company  each  year  one-tentli  of  your 
debt  to  me,  so  that  at  the  end  of  the  tenth  year  thare 
will  be  sufficient  on  deposit  to  pay  me  in  full,  I  will  re- 
lieve you  of  the  necessity  of  setting  aside  the  entire 
gross  receipts  of  your  hardware  department." 

The  City  of  New  York  finds  itself  practical  y  in  the 
situation  of  such  a  debtor  to-day.  When  the  ple  lg-^  of 
the  city's  direct  revenues  was  originally  m  ide  to  the 
Sinking  Fund  in  1844,  there  was  not  the  slightest  con- 
ception of  what  their  future  magnitude  would  be.  Now 
that  we  do  know  what  they  are  and  can  see  clearly  that 
the  city's  Hnances  are  in  a  fair  way  to  be  strangled  if 
relief  is  not  afforded, it  would  be  sheer  fatuity  not  to  set 
vigorously  to  work  at  a  com. non  sense  readja^tmant  of 
the  debt  service. 

Such  a  readjustment  would  be  practically  accom- 
plished by  the  plan  you  advance.  It  is  immaterial,  so 
far  as  concerns  results,  whether  the  surplus  accumula- 
tions of  the  Sinking  Fund  be  directly  applied  under 
legislative  sanction  to  the  reduction  of  taxation,  as  I 
suggested  two  years  ago,  or  whether  the  same  en  1  be 
accomplished  indirectly  through  Mr.  Stev -nson's  plan. 
I  admire  the  ingenuity  of  the  latter,  which  tights  lire 
with  fire  by  adopting  a  f  highly  technical  method 
of  avoiding  an  equally  technical  objection,  whieh  might 
otherwise  conceivably  (though  surely  ili-advisedly)  be 


17 


raised  by  some  boiidhoklei-  under  the  coiitractural 
pled^:e"  of  1878. 

There  is  one  minor  feature  of  tins  plan  to  wliicli, 
however,  I  would  suggest  an  amendment.  The  invest- 
ment in  General  Fund  Bonds  by  the  Sinking  Fund 
Commissioners  of  the  exact  amount  of  tlx^  annual  sur- 
plus is  made  mandatory.  Might  it  not  be  better  to 
make  this  provision  permissive  only  in  terms?  In  1904 
and  in  1907  and  the  two  succeeding  years,  abnormally 
large  amounts  of  bonds  redeemable  from  the  Redemp- 
tion Fund  fall  due.  While  the  receipts  of  that  fund  in 
each  of  these  years  might  be  sufficient  to  redeem  these 
bonds,  it  would  require  practically  the  whole  of  such 
receipts,  and  scarcely  any  balance  would  be  left  for  in- 
vestment in  those  small  authorizations  of  bonds  which 
it  is  inconvenient  to  include  in  public  sales.  Moreover, 
the  fact  that  most  City  bonds  mature  on  dates  not  later 
than  November  1,  would  render  it  impossible  to  take 
advantage  of  a  whole  year's  Sinking  Fund  revenues. 
It  seems  to  me  that  this  point,  while  of  minor  import- 
ance, is  worthy  of  consideration. 

With  the  main  purpose  of  your  plan,  however,  I  am 
in  the  fullest  accord  and  sympathy,  and  as  one  who 
appreciates  its  importance  to  the  welfare  of  the  City,  I 
desire  to  express  my  thanks  for  the  public  service  you 
are  performing. 

Very  truly  yours, 

Edgar  J.  Levey. 


18 


(Copy.)  Personal  and  Confidential. 

Oct.  14,  1902. 

Hon.  Edward  M.  Grout, 

Comptroller,  etc. 

Dear  Sir. — Yours  lOtli  rec'd. 

You  say  that  it  has  always  been  the  uniform  practice 
of  the  Sinking  Fund  Commissioners  to  invest  from  time 
to  time  in  various  securities  freshly  issued  by  the  City, 
but  has  it  ever  been  their  practice  to  invest  in  any  se- 
curities not  issued  until  issued  to  them  for  investment  ? 

The  investment  I  think  must  have  the  effect  to  dim- 
inish the  debt.    Your  proposed  plan  does  not. 

In  the  cases  to  which  yoa  refer  the  bonds  are  issued 
for  a  consideration  and  to  purchase  them  diminishes 
the  debt.  In  your  proposed  plan  they  are  issued  for  no 
consideration.  The  City  gets  nothing  and  diverts  its 
sinking  fund  to  general  purposes  to  the  relief  of  the 
taxpayer. 

You  misunderstand  my  second  letter.  I  did  not 
mean  to  suggest  that  the  law  required  the  sinking  fund 
to  be  accumulated  only  until  it  had  become  sufficient 
to  pay  the  bonds  secured  thereby,  but  merely  that  it 
must  be  accumulated  to  at  least  that  extent.  If  accu- 
mulated to  that  extent  another  question  might  arise  as 
to  whether  it  was  necessary  to  accumulate  further. 

Y^ou  say  that  I  am  the  only  one  who  has  expressed  an 
opinion  unfavorable  to  your  plan. 

Perhaps  I  am  the  only  one  to  whom  the  point  has 
presented  itself. 

However,  several  to  whom  I  have  presented  the  ques- 
tion as  an  abstraction  have  emphatically  taken  my  view 
of  it.  To  me  it  seems  so  plain  as  to  be  hardly  debate- 
able  and  I  can  see  no  answer  to  the  point  that  you  are 


19 

trying  to  do  indirectly  what  you  concede  cannot  be 
done  directly. 

I  need  not  say  that  I  am  always  at  your  service. 

Yours  truly, 

WlIEELEU  H.  PeCKIIAM, 

I  have  carefully  read  Ch.  383,  L.  1878.  It  seems 
most  emphatically  to  sustain  may  views. 


(Copy.)  Oct.  16,  1902. 

Hon.  Edward  M. Grout, 

Comptroller,  &c.  City  Hall, 

City. 

My  dear  sir. 

Thanks  for  yours  of  13th  inst.,  with  enclosure  of 
printed  copy  of  letter  of  1  Itli  inst.  addressed  to  you  by 
Mr.  Edgar  J.  Levey. 

Mr.  Levey's  attention  does  not  seem  to  have  been 
called  to  the  point  in  issue.  He  certainly  does  not 
treat  it. 

It  is  quite  possible  that  the  course  you  suggest  might 
be  carried  out  without  objection  by  bondholders  or  any 
one  ;  because  the  City's  credit  is  so  good  that  no  atten- 
tion would  be  paid  to  it. 

Nevertheless  it  is  to  me  a  perfectly  plain  violation  of 
the  City's  contract  and  one  which  if  ever  challenged 
w^ould  be  restrained  by  the  Courts. 

Thanking  you  for  your  courtesy,  I  am 

Yours  truly. 

Wheeler  H.  Peckham. 


